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FEATURE OUTSOURCING

“The increase in outsourcing may have reduced OPPOSITE: The wings of Boeing’s
the costs of some components, but this cost Dreamliner are produced by Mitsubishi
Heavy Industries, Fuji Heavy Industries
has been more than offset by increased and Kawasaki Heavy Industries
redesign costs and expensive delays” BELOW: The fuselage of a Airbus A350
XWB aircraft being flown in for assembly
in Toulouse, France

unique aspects of this aircraft production “Companies need to retain adequate ultimately, sales. With the Dreamliner,
process favour vertical integration over control over specialised components that Boeing outsourced more than on any
outsourcing,” she writes in her report. differentiate their products or have unique previous aircraft, using a previously
Enough said. interdependencies – or they are more likely unheard of 70% or so of external supply.
Bigelow’s study, which was published to fail,” she warns. This is borne out by the “In this situation, it’s no surprise when
in the journal Organisational Science, data from Bigelow’s report, which indicated things break down,” Bigelow says. This
looked at the importance of vertical that the business failure rate (bankruptcy aim of knocking Airbus off the number
integration (or in-house manufacturing) or liquidation) in firms surveyed was one spot, combined with a dramatically
to the health of an organisation. Bigelow increased by anywhere between 5% and increased level of complexity, meant the
and co-author Dr Nicholas Argyres looked 70%, over operations that did not outsource company had to increase its reliance
at the automotive business for its raw production or components. on suppliers – who may well have had
data, but noted the results could apply In Boeing’s case, the desire to use less pressing incentives to maintain and
to any similarly technical manufacturing the 787 to grab back the number one improve end-product quality.
industry. The report also noted that the position from Airbus in 2005 meant it used
current economic environment is forcing outsourcing extensively. This was to help up-to-speed sourcing
firms to focus on reducing costs while still accelerate design and build of critical However, it’s not all doom and gloom.
trying to maintain value to customers, and components such as the wings, fuselage, Airbus has assumed the role of
that outsourcing is a popular approach to engines electrical systems and software, outsourcing pioneer in the large aircraft
this challenge. But, they ask, is this the all with an eye on reducing production industry, with fuselage, wings, stabiliser
best approach in the long term? costs. Also, increased demand to reduce and many other major components all
The ultimate objective, greater development costs, cut carbon emissions, outsourced across Europe and beyond for
efficiency and reduced cost, can come with and improve the aircraft’s operating many aircraft in its line-up. This applied
an unforeseen overhead, says Bigelow’s efficiencies all contributed to the decision most obviously to the A380.
analysis – that of reliance on a supplier’s to outsource many engineering services. Airbus was committed to outsourcing,
QA and development incentives being out The other bonus that Boeing saw partly as a nod to its company structure
of sync with the outsourcer. As companies from outsourcing was to bring in a being based Europe-wide, and partly to
slash staff and turn to outsourcing, an higher proportion of local component keep specialist construction costs down.
outsourcing strategy may actually prejudice manufacture from overseas companies The difference was that from the start,
the future of their products, she asserts, – with an eye on export offsets and Airbus factored in the management and
especially in high-tech industries. In fact,
Bigelow’s team found that companies were
more likely to fail at maintaining value
when they outsourced components critical
to their competitive position.
“Across the board, we found statistically
significant increases in the failure rate for
firms that don’t consider transaction costs
in their outsourcing decisions,” she says.
“Firms need to look beyond production
costs to other costs such as poor quality,
delivery delays and risk of price increases
by suppliers.” All of which were major
problems for Boeing, resulting in years of
delay for the first deliveries of the 787.
“This is a critical strategic choice
that firms make,” Bigelow notes.
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